Where is Microsoft based? Redmond in Washington State, you might say. Except that when it comes to licensing its software, apparently that all happens from an office in Reno, Nevada. At least, that's where it records its software licensing revenue.

Seem odd? Certainly. Why? Because it means it doesn't pay a tax on software licensing, which Washington State applies. And according to Jeff Reifman - who has written a devastating blogpost rectifying this bit of tax, er, avoidance* (because Washington State is facing a deficit of $430m in its biennial budget) could balance the state's budget:

Over the past thirteen years, I estimate that Microsoft has avoided paying more than $707 million in taxes on sales of its corporate software licenses (see Citizen Microsoft and Microsoft's $528 million Washington tax break). Although the majority of its software development is performed in Washington State, Microsoft records its estimated $18 billion in licensing revenue per year through a corporate office in Reno, Nevada where there is no licensing tax.

A good-sized piece of Microsoft's $58 billion in revenues in its last fiscal year touched ground, however briefly, in the company's licensing operation in Reno.

And a Microsoft executive says the operation is likely to continue growing at about the same pace as the rest of the software giant headquartered at Redmond, Wash.

And among the things that Microsoft identified as being needed to be a great community, according to Chris Weber, a Microsoft vice-president, in that interview, is

Community involvement. People want to work for a company that gives back to the local community, Weber said.

Perhaps it depends which "local" community you're talking about. As the Microsoft Licensing site says, "It's amazing what you can do here". Why, yes, it is. Like cutting your tax bills by millions of dollars. That's pretty amazing in anyone's books.

Back to Reifman:

Under [Washington] state's 0.484 percent software royalty tax(lowered from 1.5 percent in 1998 after industry lobbying), I estimate that Microsoft should have paid more than $90 million in 2008 and $87 million in 2009 in state taxes.

Those aren't trivial amounts. Reifman suggests that Microsoft has been doing this for 13 years, and that the back taxes owed amount to $707m. (It would have been $2.8bn if the software royalty tax hadn't been lowered following industry lobbying, he calculates.)

As he also points out,

Since Microsoft began operations in Reno in 1997, it has enjoyed record-setting revenue of more than $446 billion and profit of more than $124 billion. If it paid its actual tax bill in full today, it would still have more than $24 billion in cash holdings.

Still puzzled? Reifman set out how it works in an earlier article in Crosscut (linked above):

Here's how the practice works: Microsoft's product teams, based mostly in Redmond and Issaquah, build software products such as Windows Vista, Windows Server, SQL Server, and Office. But sales of these products to PC manufacturers and corporate customers are conducted from a License and Operations office in Reno, Nev., where there is no corporate income tax. Microsoft records the revenue for these sales (traditionally about 31 percent of overall revenue) in Nevada and does not pay the Washington business and occupation tax required on software reproduction.

Mm. I'd say Microsoft has some questions to answer. Reifman has also blogged about peoples' responses (often justifications) for Microsoft's practice - with his own analysis, which could be boiled down to "sure, Microsoft might move if the Washington State attorney applies this. But it might not." (He's more eloquent though.)

Of course, the directors of a company have a responsibility to shareholders to organise their business in the most tax-efficient way possible while remaining inside the law.

The question is: is Microsoft really acting in everyone's best interests - including its own? If Washington State can't balance the books, its own employees in Redmond will lose out in one way or another, and Redmond (and Seattle) will be less attractive places to work.

Not of course that that necessarily makes California - which has its own whopping budget deficit to deal with - any more attractive.

After all the good works Bill Gates has done for those in the developing world, is it time for him to do something for the developed one too?